Conference Documents

Working papers

This paper reviews the theoretical and empirical literature on the role of blockholders (large shareholders) in corporate governance. We start with the underlying property rights of public corporations; we discuss how blockholders are critical in...Read more

Working papers

Outside directors and audit committees are widely considered to be central elements of good corporate governance. We use a 1999 Korean law as an exogenous shock to assess how board structure affects firm market value. The law mandates 50% outside...Read more

We report strong OLS and instrumental variable evidence that an overall corporate governance index is an important and likely causal factor in explaining the market value of Korean public companies. We construct a corporate governance...Read more

We study the resolution of financial distress in shipping, where the ex-territorial nature of assets has distanced the industry from on-shore bankruptcy legislation. We demonstrate how contracts and private institutions have adapted to the...Read more

Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders. In this survey we review the theoretical and...Read more

Outside directors constitute a key component of most prescriptions for good governance of public companies. Given that outside directors are important corporate governance players, one is led to wonder what will motivate the individuals serving...Read more

The paper analyzes 362 European activist interventions by hedge funds, focus funds and other activist investors from 2000 to 2008. The sample includes both public and private interventions. The private interventions are based upon proprietary...Read more

This Report was prepared, with support by the World Bank, for the Russian Center for Capital Market Development and the Russian Federal Service on the Securities Market (FSFM). We discuss the liability under company law of members of the board of...Read more

Coffee

Session 2

Public Pension Funds and Corporate Political Activism

Speakers:

Discussant:

Public Pension Funds and Corporate Political Activism

Time:

11:45h

- 12:35h

This paper analyzes agency con icts between U.S. public pension funds and other shareholders. It studies the landmark decision by the U.S. Supreme Court on Citizens United v. FEC, which opens new doors for political activism by business. At the ruling, politically connected rms held by public pension funds have lower announcement returns. After the ruling, these rms remain engaged in political connections and experience a relative increase in ownership by public pension funds. Our evidence is consistent with public pension funds having a preference for more traditional forms of political activism, a preference not shared by other investors.

Most listed firms are freestanding in the U.S, while listed firms in other countries often belong to business groups: lasting structures in which listed firms control other listed firms. Hand-collected historical data illuminate how the present...Read more

A central challenge in the regulation of controlled firms is curbing controller tunneling. As independent directors and fiduciary duties are widely seen as not up to the task, a number of jurisdictions have given minority shareholders veto rights...Read more

This paper analyzes the effect that the U.S. Supreme Court’s landmark decision on Citizens United vs. FEC had on corporate political activism. The decision opened the door for corporate treasuries to engage in independent political...Read more

We investigate whether cultural differences between professional decision-makers affect financial contracts in a large dataset of international syndicated bank loans. We find that more culturally distant lead banks offer borrowers smaller loans...Read more

Lunch

Session 3

A Collaborative Model of the Corporation

Speakers:

Discussant:

A Collaborative Model of the Corporation

Time:

13:45h

- 14:35h

Two models of the corporation dominate legal discourse. The first is the management-power model, which is premised on vesting corporate insiders -- officers and directors -- with primary decision-making power. The second is the shareholder-power model which contemplates increased shareholder power to reduce managerial agency costs and self-dealing. Both models assume that insiders and shareholders engage in a competitive struggle for corporate power and address, descriptively and normatively, the appropriate allocation of that power.

Corporate law and practice have moved beyond existing theories of the corporation framed in terms of a competitive power struggle between insiders and shareholders, however. Increasingly, the insider- shareholder dynamic in the modern corporation is collaborative, not competitive. This Article responds to this development, defending a collaborative model of the corporation on both descriptive and normative grounds. In particular, the Article uses game theory to demonstrate how insider-shareholder collaborations are likely to produce complimentary information that increases firm value.

The collaborative model offers several insights for corporate governance. First, it suggests that, to enhance collaboration, core governance provisions should be the product of bilateral action involving both insiders and shareholders. Second, board insulation mechanisms should require shareholder input. Finally, doctrines constraining director use of corporate information should facilitate rather than frustrating information sharing between activist directors and their principals. In turn, implementation of these principles requires rethinking and adapting several existing principles of corporate law.

Working papers

Event studies have become increasingly important in securities fraud litigation after the Supreme Court?s decision in Halliburton II. Litigants have used event study methodology, which empirically analyzes the relationship between the disclosure...Read more

Two models dominate the debate on the theory of the firm. Under the management-power model, decision-making power exclusively belongs to corporate insiders (officers and directors). The competing shareholder-power model contemplates increasing...Read more

Passive investors — ETFs and index funds — are the most important development in modern day capital markets, dictating trillions of dollars in capital flows and increasingly owning much of corporate America. Neither the business model of passive...Read more

In 2015, Delaware made several important changes to its laws concerning merger litigation. These changes, which were made in response to a perception that levels of merger litigation were too high and that a substantial proportion of merger cases...Read more

There is mounting evidence that retail investors make predictable, costly investment mistakes, including underinvestment, naïve diversification, and payment of excessive fund fees. Over the past thirty-five years, however, participant-directed...Read more

Directors have traditionally been elected by a plurality of the votes cast. This means that in uncontested elections, a candidate who receives even a single vote is elected. Proponents of “shareholder democracy” have advocated a shift to a...Read more

Institutional Investors' Impact on the Outcome of Freezeout Tender Offers

Speakers:

Discussant:

Miriam Schwartz Ziv

Back to full programme

Institutional Investors' Impact on the Outcome of Freezeout Tender Offers

Time:

14:35h

- 15:25h

We study institutional investors' impact on going private tender offers by controlling shareholders ("freezeout" offers) because these are occasions where engagement-restraining considerations such as keeping the long term relations with the firm are less relevant. Further, we examine data from Israel, where regulation over freezeout offers is loose and where (consequently?) about half of the offers are rejected. We find that in accepted offers, the offer premium increases with institutional investor holdings. Institutional ownership also increases the likelihood that the offer is rejected. However, in rejected offers, institutional investors do not appear to add to public value. This complex evidence is consistent with institutional investors acting as strategic bargaining agents.

We examine the effects of a law amendment in Israel in 2011 that imposes a set of minimum corporate governance standards on privately held firms that issue publicly traded bonds. Two main results emerge. First, consistent with US evidence, the...Read more

We examine an extensive matched sample of U.S. dual and single class firms in 1980-2015 from the time of their IPO, and document that the valuation difference between dual and single class firms varies over their life cycle. On average, around...Read more

We study institutional investors' impact on going private tender offers by controlling shareholders ("freeze-out" offers) in Israel, where regulation over such offers is loose and where (consequently?) about half of the offers are rejected. In 35...Read more

Coffee

Session 4

Soft Shareholder Activism

Speakers:

Discussant:

Sivan Frenkel

Back to full programme

Soft Shareholder Activism

Time:

15:45h

- 16:35h

This paper studies communications between investors and firms as a form of corporate governance. The main premise is that activist investors cannot force their ideas on companies; they must persuade the board or other shareholders that implementing these ideas is in the best interest of the firm. In this framework, I show that voice (launching a public campaign) and exit (selling shares) enhance the ability of activists to govern through communication. The analysis identifies the factors that contribute to successful dialogues between investors and firms. It also shows that public communications are likely to be ine§ective, justifying the prevalence of behind-the-scenes communications.

Discussants

Conference Documents

Working papers

Conventional wisdom is that diversification weakens governance by spreading an investor too thinly. We show that, when an investor owns multiple firms ("common ownership"), governance through both voice and exit can strengthen -- even if the...Read more

We developed a model under which the allocation of control rights between shareholders and managers (“governance structure”) is irrelevant to firm value. In our model, governance structures affect managers’ incentive to invest, as strong...Read more

We derive a measure that captures the extent to which common ownership shifts managers’ incentives to internalize externalities. A key feature of the measure is that it allows for the possibility that not all investors are attentive to whether a...Read more

Working papers

This article tells how a shareholder class action against Teva Pharmaceutical Industries, the largest generic drug maker in the world, ended the practice of hiding individual executive pay figures by companies crosslisted in Israel and the United...Read more

We empirically examine whether and how the doctrine of enhanced judicial scrutiny that emerged from Revlon and its progeny actually affects M&A transactions. Combining hand-coding and machine-learning techniques, we assemble data...Read more

A central challenge in the regulation of controlled firms is curbing controller tunneling. As independent directors and fiduciary duties are widely seen as not up to the task, a number of jurisdictions have given minority shareholders veto rights...Read more

Activism, Strategic Trading, and Liquidity

Speakers:

Discussant:

Zvi Wiener

Back to full programme

Activism, Strategic Trading, and Liquidity

Time:

09:50h

- 10:40h

We analyze dynamic trading by an activist investor who can expend costly e↵ort to a↵ect firm value. We obtain the equilibrium in closed form for a general activism technology, including both binary and continuous outcomes. Variation in parameters can produce either positive or negative relations between market liquidity and economic e ciency, depending on the activism technology and model parameters. Two results that contrast with the previous literature are that (a) the relation between market liquidity and economic e ciency is independent of the activist’s initial stake for a broad set of activism technologies and (b) an increase in noise trading can reduce market liquidity, because it increases uncertainty about the activist’s trades (the activist trades in the opposite direction of noise traders) and thereby increases information asymmetry about the activist’s intentions.

Working papers

Short selling campaigns by hedge funds have become increasingly common in the last decade. Using a hand-collected sample of 252 campaigns, we document abnormal returns for targets of approximately -7% around the announcement date. Firm...Read more

We develop a model in which an activist shareholder can discipline management through intervention and through the threat of intervention. A weaker disciplinary role played by the intervention mechanism leads to lower firm value and more frequent...Read more

We analyze dynamic trading by an activist investor who can expend costly effort to affect firm value. We obtain the equilibrium in closed form for a general activism technology, including both binary and continuous outcomes. Variation in...Read more

Working papers

An important milestone often reached in the life of an activist engagement is entering into a “settlement” agreement between the activist and the target’s board. Using a comprehensive hand-collected data set, we analyze the drivers, nature, and...Read more

In choosing transparency, firms must trade off the benefits from better access to finance against the cost of a greater tax burden. We study this trade-off in a model with distortionary taxes and endogenous rationing of external finance. The...Read more

Blockholder monitoring is central to corporate governance, but blockholders large enough to exercise significant unilateral influence are rare. Mechanisms that enable small block-holders to exert collective influence are therefore important. We...Read more

This paper studies mutual fund voting in proxy contests using a comprehensive sample of voting records over the period 2008 - 2015, taking into account selective targeting by activists. We find that firm, fund, and event characteristics generate...Read more

During episodes of market turmoil, institutional investors with short trading horizons are inclined or forced to sell their holdings to a larger extent than investors with longer trading horizons. This may amplify the effects of market-wide...Read more

If unemployment insurance is more generous, workers should demand less implicit insurance from their employers: firm- and government-provided insurance should be substitutes. Using a firm-level international panel dataset, we investigate this...Read more

Hedge fund activism is a new form of arbitrage. Using a large hand-collected data set from 2001 to 2006 we find that activist hedge funds in the U.S. propose strategic, operational, and financial remedies and attain success or partial success in...Read more

We establish that the labor market helps discipline asset managers via the impact of fund liquidations on their careers. Using hand-collected data on 1,948 professionals, we find that top managers working for funds liquidated after persistently...Read more

Working papers

Using a comprehensive survey, we show that investors with a larger capital allocation to private equity are more specialized − measured by the degree to which the investor focuses on private equity rather than other classes of investments − and...Read more

Cross-border venture capital (VC) investments play an important role in the scaling up of high-growth companies. However, policymakers worry that foreign VC investments transfer the majority of economic activity to the investor country. On the...Read more

Most listed firms are freestanding in the U.S, while listed firms in other countries often belong to business groups: lasting structures in which listed firms control other listed firms. Hand-collected historical data illuminate how the present...Read more

Financial intermediaries can choose the extent to which they want to be active investors, providing valuable services like advice, support and corporate governance. We examine the determinants of the decision to become an active financial...Read more

We develop a theory and empirical test of how the legal system affects the relationship between venture capitalists and entrepreneurs. The theory uses a double moral hazard framework to show how optimal contracts and investor actions depend on...Read more

This paper examines the effect of investor power in a model of staged equity financing. It shows how the usual effect where market power reduces valuations can be reversed in later rounds. Once they become insiders, powerful investors may use...Read more

Lunch

Session 3

Standing on the Shoulders of Giants: The Effects of Passive Investors on Activism

Speakers:

Discussant:

Standing on the Shoulders of Giants: The Effects of Passive Investors on Activism

Time:

14:00h

- 14:50h

We analyze whether the growing importance of passive investors has influenced the campaigns, tactics, and successes of activists. We find activists are more likely to pursue changes to corporate control or influence when a larger share of the target company’s stock is held by passively managed mutual funds. Furthermore, higher passive ownership is associated with increased use of proxy fights and a higher likelihood the activist obtains board representation or the sale of the targeted company. Our findings suggest that the large ownership stakes of passive institutional investors mitigate free-rider problems and ultimately increase the likelihood of success by activists.

Working papers

This paper provides evidence on the incidence, characteristics, and performance of activist engagements across countries. We find that the incidence of activism is greatest with high institutional ownership, particularly for U.S. institutions. We...Read more

We study how deregulation of corporate law affects the decision of entrepreneurs of where to incorporate. Recent rulings by the European Court of Justice (ECJ) have enabled entrepreneurs to select their country of incorporation independently of...Read more

Adapting to Radical Change: The Benefits of Short-Horizon Investors

Speakers:

Discussant:

Adapting to Radical Change: The Benefits of Short-Horizon Investors

Time:

14:50h

- 15:40h

We show that following large permanent negative shocks, firms with more short-term institutional investors suffer smaller drops in sales, investment and employment and have better long-term performance than similar firms affected by the shocks. To do so, these firms increase advertising, differentiate their products from those of the competitors, conduct more diversifying acquisitions, and have higher executive turnover in the aftermath of the shocks. Our findings suggest that firms with more short-term investors put stronger effort in adapting their business to the new competitive environment. Endogeneity of institutional ownership and other selection problems do not appear to drive our findings.

Working papers

We study the impact of directors with foreign experience on firm performance in emerging markets. We use a unique dataset from China and exploit that at different times, Chinese provinces introduced policies to attract highly talented emigrants....Read more

Using a sample that provides unprecedented detail on foreign listings for 29 exchanges in 24 countries starting from the early 1980s, we show that although firms list in countries with better investor protection, they are less likely to list in...Read more

We study whether the individual decision to become an entrepreneur, entrepreneurial profits and investment are affected by the decisions of other individuals belonging to the same social group. To overcome identification problems, we include...Read more

We exploit the domestic portfolios of US mutual funds to provide microeconomic evidence that investors are more likely to liquidate geographically remote investments at times of high aggregate market volatility. This has important implications...Read more

We proxy for board members’ differences in opinions and values using directors’ ancestral origins and show that diversity has costs and benefits, which lead to high performance volatility. Consistent with the idea that diverse groups experiment...Read more

While the positive growth effects of financial integration are extensively documented, little is known of its impact on small and young firms. This paper aims to fill this void relying on a panel of 60,000 firm-year observations on listed and...Read more

Using a data set that provides unprecedented detail on investors' stockholdings, we analyze whether investors take the quality of corporate governance into account when selecting stocks. We find that all categories of investors who generally...Read more

Session 4

Do Institutional Investors Monitor their Large vs. Small Investments Differently? Evidence from the Say-On-Pay Vote

Speakers:

Discussant:

Do Institutional Investors Monitor their Large vs. Small Investments Differently? Evidence from the Say-On-Pay Vote

Time:

16:00h

- 16:50h

We consider institutional voting on Say-On-Pay as a function of the size of an institution's position. Smaller positions, measured either as percent of a firm held or portfolio weight invested in a firm, lead to lower support of management in SOP voting, consistent with small-scale investors having limited incentives and opportunity to participate in governance through alternative venues. This result is largest when the firm has significant blockholder presence, and holds independent of ISS recommendations. We also find that the size of investment at the institutional advisor level, rather than the fund level, better predicts voting. Hence, in companies with a dispersed shareholder structure, the SOP vote is particularly likely to be used to oppose management. To summarize, we find that, when a low-cost monitoring opportunity is made available, small institutional positions, which aggregate to a large level of ownership across institutions, can play a meaningful role in corporate governance.

Working papers

The relationship between changes in GDP and unemployment during the 2008 financial crisis differed significantly from previous experiences and across countries. We study firm-level decisions in France, Germany, Japan, the UK, and the US. We find...Read more

Are courts effective monitors of corporate decisions? In a controversial landmark case,
the Delaware Supreme Court held directors personally liable for breaching their fiduciary
duties, signalling a sharp increase in Delaware?s...Read more

Relative performance evaluation (RPE) in CEO compensation can be used as a commitment device to pay CEOs for their revealed relative talent. We find evidence consistent with the talent-retention hypothesis, using two different approaches. First,...Read more

Conference Documents

Working papers

This paper reviews the theoretical and empirical literature on the role of blockholders (large shareholders) in corporate governance. We start with the underlying property rights of public corporations; we discuss how blockholders are critical in...Read more

Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders. In this survey we review the theoretical and...Read more

A central problem in conducting an event study of the valuation effects of corporate governance reforms is that most reforms affect all firms in a country. Share price changes may reflect the reforms, but could also reflect other information. We...Read more

We discuss empirical challenges in multicountry studies of the effects of firm-level corporate governance on firm value, focusing on emerging markets. We assess the severe data, “construct validity,” and endogeneity issues in these studies,...Read more

This article reports a unique analysis of private engagements by an activist fund. It is based on data made available to us by Hermes, the fund manager owned by the British Telecom Pension Scheme, on engagements with management in companies...Read more

We report strong OLS and instrumental variable evidence that an overall corporate governance index is an important and likely causal factor in explaining the market value of Korean public companies. We construct a corporate governance...Read more

Outside directors and audit committees are widely considered to be central elements of good corporate governance. We use a 1999 Korean law as an exogenous shock to assess how board structure affects firm market value. The law mandates 50% outside...Read more

Public Pension Funds and Corporate Political Activism

Public Pension Funds and Corporate Political Activism

Time:

11:45h

- 12:35h

This paper analyzes agency con icts between U.S. public pension funds and other shareholders. It studies the landmark decision by the U.S. Supreme Court on Citizens United v. FEC, which opens new doors for political activism by business. At the ruling, politically connected rms held by public pension funds have lower announcement returns. After the ruling, these rms remain engaged in political connections and experience a relative increase in ownership by public pension funds. Our evidence is consistent with public pension funds having a preference for more traditional forms of political activism, a preference not shared by other investors.

Conference Documents

Working papers

We investigate whether cultural differences between professional decision-makers affect financial contracts in a large dataset of international syndicated bank loans. We find that more culturally distant lead banks offer borrowers smaller loans...Read more

This paper analyzes the effect that the U.S. Supreme Court’s landmark decision on Citizens United vs. FEC had on corporate political activism. The decision opened the door for corporate treasuries to engage in independent political...Read more

Most listed firms are freestanding in the U.S, while listed firms in other countries often belong to business groups: lasting structures in which listed firms control other listed firms. Hand-collected historical data illuminate how the present...Read more

A central challenge in the regulation of controlled firms is curbing controller tunneling. As independent directors and fiduciary duties are widely seen as not up to the task, a number of jurisdictions have given minority shareholders veto rights...Read more

A Collaborative Model of the Corporation

A Collaborative Model of the Corporation

Time:

13:45h

- 14:35h

Two models of the corporation dominate legal discourse. The first is the management-power model, which is premised on vesting corporate insiders -- officers and directors -- with primary decision-making power. The second is the shareholder-power model which contemplates increased shareholder power to reduce managerial agency costs and self-dealing. Both models assume that insiders and shareholders engage in a competitive struggle for corporate power and address, descriptively and normatively, the appropriate allocation of that power.

Corporate law and practice have moved beyond existing theories of the corporation framed in terms of a competitive power struggle between insiders and shareholders, however. Increasingly, the insider- shareholder dynamic in the modern corporation is collaborative, not competitive. This Article responds to this development, defending a collaborative model of the corporation on both descriptive and normative grounds. In particular, the Article uses game theory to demonstrate how insider-shareholder collaborations are likely to produce complimentary information that increases firm value.

The collaborative model offers several insights for corporate governance. First, it suggests that, to enhance collaboration, core governance provisions should be the product of bilateral action involving both insiders and shareholders. Second, board insulation mechanisms should require shareholder input. Finally, doctrines constraining director use of corporate information should facilitate rather than frustrating information sharing between activist directors and their principals. In turn, implementation of these principles requires rethinking and adapting several existing principles of corporate law.

Working papers

We examine the Centros decision through the lens of SB 826 – the California statute mandating a minimum number of women on boards. SB 826, like the Centros decision, raises questions about the scope of the internal affairs doctrine...Read more

Despite the increasing importance of shareholder voting, regulators have paid little attention to the rights of retail investors who own approximately 30% of publicly traded companies but who vote less than 30% of their shares. A substantial...Read more